LONDON – Moody’s, the ratings agency that ranks the quality of bonds and other credit-based assets, downgraded the outlook on four out of five types of UK consumer debt investments this week. The analyst team concluded:
- “Household indebtedness is already very high by historical standards”; Household savings hit a record low; Income growth is negative after housing costs.
In sum, British people have too much debt, not enough savings, their incomes are in decline, and that is creating “a real macroeconomic challenge,” Moody’s says.
Moody’s analysis says the UK economy is likely to get worse if the government fails to secure a good Brexit deal:
“Under the Brexit negotiations, our base case remains that the two sides will come to an agreement that captures many-but not all-of the current trade arrangements. However, there is the added uncertainty in the run-up to the final exit and the substantial probability that negotiations will fail and no agreement will be reached. Macroeconomic disruption from a ‘no deal’ could be significant.”
The note sums up the entire British economy in just three charts.
Debt as a percentage of income:
The growth of that debt has vastly outpaced growth in income:
And savings are in decline at the same time as disposable income:
Technically, Moody’s made the following change to its ratings outlook: Auto asset backed securities (ABS), credit card ABS, buy-to-let residential mortgage-backed securities (RMBS), and “non-conforming” RMBS’s were all moved to “negative” from “stable.” Only prime RMBS’s – mortgages on high-end properties – remain “stable.”
Auto ABS has become a new worry at the Bank of England, as more than 80% of new cars in the UK are sold under “PCP” agreements in which the driver pays less than the full value of the vehicle and has some rights to give the car back if they don’t want to continue paying for it. Some analysts worry that the system is unstable.